Sunak’s bad deal for Northern Ireland is an even worse deal for the UK

By Harry Western – 7 minute read

The proposed Windsor Framework is bad deal for Northern Ireland and for the UK as a whole, with the bold claims made for it by the UK government not standing up to close scrutiny. Minor gains have been negotiated on trade in a few areas, but overall trade between Great Britain and Northern Ireland will at best be marginally easier and will still be beset by extensive bureaucracy. Problems related to state aid and VAT also remain, as does ECJ supremacy, and the so-called ‘Stormont Brake’ designed to close the democratic deficit in Northern Ireland will be almost impossible to use. Worse still, the deal gives the EU new levers to try to force the UK into regulatory alignment – if brought into operation, the Windsor Framework would be a major drag on UK regulatory divergence from the EU.

At the start of February, I warned that proposals being floated for a new deal over the Northern Ireland Protocol (NIP) looked like being a capitulation by the UK on all the key points. A month later, and the UK and EU have unveiled the ‘Windsor Framework’ (WF), with a blizzard of PR from the UK side. Among other things, the UK government claims that the new deal means:

• Free flowing trade within the UK via a ‘green lane’ for goods
• No border in the Irish Sea
• The same tax rules applying everywhere
• The closure of the ‘democratic’ deficit (where Northern Ireland was subject to EU rules with no say in them)

Are these claims accurate? The short answer is no. In our view, the Windsor Agreement is largely a PR exercise which achieves very little in the key areas. Far from replacing the protocol, it actually entrenches it and in addition gives the EU new ways to exercise its influence and authority over the whole of the UK. Let us look at the most important aspects in turn:

Trade between GB and Northern Ireland

There are some positive changes to trade between GB and NI in the new deal. There is a new ‘green lane’ proposed for goods moving from GB to NI which are destined to stay in NI, underpinned by a new real-time data sharing framework. There are also genuine easements in some sectors. Mixed loads of agri-food goods will only require one certificate per load rather than multiple ones; the small business exemption from some rules has been widened; certification for some goods like wine has been removed; and there are new arrangements to allow parcels and goods in problem areas like medicines, chilled meats, horticultural products, seed potatoes, and steel that is subject to tariff-rate quotas, to be traded from GB to NI.

However, it is absolutely not correct to argue that the trade and regulatory border created by the original protocol in the Irish Sea has been removed by the WF:

(i) Goods will continue to be divided into those ‘at risk’ and ‘not at risk’ of entering the EU, with a complex bureaucratic system used to determine in which category goods are placed. The presumption of a customs border in the Irish Sea remains.

(ii) The ‘green lane’ does not remove customs formalities and paperwork, nor does it apply to all goods travelling from GB to NI:

• UK firms will need to join a trusted trader scheme to qualify for the green lane, the qualification requirements for which are not entirely clear (will small and micro businesses qualify? How expensive will it be? How long would you need to have been trading for?). The EU notes that the trusted trader scheme will need to be ‘more robust’ than its predecessor, with firms taking part needing to ‘prove that they are of good financial standing, that they have a clear understanding of their obligations under the scheme and that they are able to correctly identify the goods they move to Northern Ireland, in particular as regards goods that need to be declared with a higher level of detail’
• Although firms using the green lane will benefit from reduced customs paperwork this will not disappear entirely. There will still be considerable data entry requirements and other significant compliance and record keeping requirements (see here, Article 9 and Annex II) which may dissuade GB firms from trading with NI.
• Checks on goods moving through the green lane will continue. Identity checks will operate on retail food goods on a reducing scale from 10% to 5% by 2025. Physical checks will also continue on a ‘risk-based’ and ‘intelligence-led’ basis
• Some goods from GB used for commercial processing by NI firms will not be allowed to use the green lane. This is not insignificant as NI firms rely heavily on inputs from GB. There is an exemption for smaller firms, but this probably excludes around 2/3 of the value of Northern Irish purchases from GB of this kind. Around one quarter of NI purchases of goods from GB are by manufacturing firms, most of which will be used for processing, and a large share of these will not be able to use the green lane. A significant proportion of goods purchased by NI wholesalers from GB (a further quarter of the total) may also be unable to use the green lane as they are intended to be sold for commercial processing. Looking at the overall structure of NI goods purchases from GB, only 50-60% are fairly certain to be able to use the green lane, with quite a large grey area.
• Goods subject to EU anti-dumping actions would also not be allowed to use the green lane
• Goods without a clear end-point of sale will need to use the ‘red’ lane and face full EU customs processes. The UK will be required to build border control posts in NI to cater for this. The position for food products with multiple origin components will be complex and some goods passing from GB to NI could be subject to tariffs

(iii) In order to allow this green lane system to operate, UK firms will face onerous new labelling requirements:

• In January, Marks & Spencer warned that such rules would mean “overbearing and prohibitive costs” for retailers, and this looks to be a genuine risk. Labels stating ‘not for EU’ will need to be placed on individual packs and containers and on shelves in stores, accompanied by posters in the stores. This is a retrograde throwback to the ‘UKNI’ labelling of the old ‘backstop’ arrangement promoted by Theresa May’s government
• It looks likely that GB firms will prefer to use this labelling UK-wide rather than just for goods headed to NI as it is probably not practical to decide at the point of manufacture what will and will not be going to NI. This would increase the cost UK-wide (and may mean some firms withdrawing from sales of goods to NI)

(iv) Some of the bespoke solutions offered in key problem areas are still incomplete:

• Seed potatoes will only be able to be traded from grower to grower, not direct to consumers
• Parcels from businesses to consumers will need to be underpinned by an authorised carrier regime and the full regime for business-to-business parcels has yet to be laid out
• Pet movements will still be subject to some paperwork
• For some problem areas like fishing (where under the original protocol NI fishermen would be treated as foreign when landing catch in their own ports) and some agricultural products no solution seems to have been found. Duty free sales will still not be available on NI flights to either the EU or UK

(v) NI firms will still be subject to EU regulations on products and production processes. The ‘dual regulatory system’ the UK had been seeking under which NI firms could choose between UK and EU rules has not been agreed

It should be clear from the above that the ‘green lane’ system does not mean unhindered trade between GB and NI and certainly does not restore the trade aspects of Article 6 of the Act of Union whereby all traders are required to be on the ‘same footing’.

Indeed, it is unclear whether the green lane scheme will even deliver a net freeing of GB to NI trade flows:

• To date, GB to NI trade flows have been substantially eased by the UK’s unilateral extension of grace periods on movements of supermarket goods, medicines, and parcels but these grace periods will end under the WF
• On top of this, many of the supposed checks that should have been carried out on GB to NI flows have not been occurring due to political sensitivities and capacity issues. The requirements for customs administration and checks under the WF (including the new border posts), plus the onerous labelling rules will all depress GB to NI trade, especially for small businesses who will be less able to afford the compliance costs
• As a result, our assessment is that the WF will at best deliver a very modest net easing of trade barriers relative to the current situation. Inefficient diversion of NI’s trade from GB to the EU will continue, with negative effects on the competitiveness of NI firms and on NI living standards

The new trade arrangements laid out in the WF are also problematic from a legal standpoint. As former NI Attorney General John Larkin has pointed out, the new provisions for trade under the WF, which are contained in a draft decision of the UK-EU Joint Committee can be (after a notification process), terminated or suspended by the EU (the EU notes that suspension is possible ‘if the UK does not live up to the commitments it undertook when setting up the trusted trader scheme’ which is very open-ended and subjective to say the least). Larkin notes that easements ‘continue to exist purely on the basis of the EU’s grace and favour. This is not a solid foundation’. Larkin even queries whether the draft decision goes beyond the power conferred on the Joint Committee in the original protocol.

There are two further problems resulting from this:

• The capacity for these trade easements to be disrupted at will by the EU could create a long-term chilling effect on trade
• The ability of the EU to do this could be misused to leverage other concessions from the UK – an issue to which we will return later

VAT and state aid

The government’s claim that the WF means ‘the same tax rules applying everywhere’, which refers to VAT and excise rates, is misleading:

• The proposed changes are minor and hedged around with significant conditions. Reduced VAT rates, rates below 5%, or exemptions will be allowed in a few specific areas (e.g. goods installed in immovable property in NI) and there is some extra freedom in setting excise rates on alcohol – albeit only on hospitality sales, not off-sales or supermarket sales, and subject to EU minimum rates. The UK will not have to apply the new EU scheme on VAT for small businesses, but its own scheme will need to respect EU rules on the turnover threshold. A solution seems to have been found for the second-hand car issue
• It is certainly not the case that the UK regains complete freedom in these areas. There are limits to how low tax rates can go, and the EU also specifies that changes ‘should not lead to fiscal fraud risks or to any potential distortion of competition’ – a very open-ended clause. So the EU retains a large measure of control, and potential to cause mischief, in these areas

Government claims to have dealt with problems related to EU state aid rules applying in Northern Ireland also misrepresent reality:

• Although there is a new Joint Declaration by the UK and EU Commission about the circumstances under which UK subsidies might affect trade between NI and EU this has no legal force
• As the EU makes clear, The WF has not modified state aid rules applying under Article 10 of the Northern Ireland protocol. The disparity of state aid rules between GB and NI is also arguably incompatible with Article VI of the Act of Union
• The very serious problem of ‘reach back’ effects into the rest of the UK remains. This means that not only does the EU influence state aid decisions in NI but also potentially does so with regard to state aid decisions in the rest of the UK if there are potential links to NI. The significant legal uncertainty this reach back effect creates has already been advertised in the UK High Court in the British Sugar One unfortunate side effect of these clauses is to incentivise recipients (or potential recipients) of UK state aid to withdraw from the NI market

The ‘Stormont Brake’

The government claims that a new ‘Stormont Brake’ will close the democratic deficit in NI created by the original protocol. On the face of it, this new mechanism appears positive. 30 members of the Northern Ireland Assembly from at least two parties can object to proposed new EU laws and amendments to existing ones and if the UK government agrees these legislative changes could potentially be blocked. But a close look at how this mechanism is supposed to work shows that in fact the brake is not especially novel and in practice is likely to be of little use:

• There already was a system in the original protocol like this, whereby the UK government could block new EU laws and there would then be a dispute settlement process. The new WF ‘brake’ only extends this to amendments of existing laws and allows the Northern Ireland Assembly to (potentially) trigger the objection
• The specified tests for using the brake will be very difficult to meet. New EU laws or changes to existing ones need to have ‘a significant and lasting impact on the everyday lives of Northern Ireland residents’ which is ‘likely to persist’. Moreover, notification to use the brake ‘is only being made in the most exceptional circumstances and as a last resort, having used every other available mechanism’ which includes widespread consultation
• The ‘brake’ does not apply to the huge corpus of existing EU laws and the extension to amendments will probably mean little as most of these will be minor and are unlikely to pass the tests outlined for using the brake. It also only applies to a subset of new EU laws (excluding those applicable by virtue of virtue of Article 2 and Annex 1, Article 10, and Annex 10)
• The process for using the brake is very complicated. If the NI assembly objects to a new EU legislative proposal, it then has to ask the UK government to pull the brake. The UK and EU then need to meet in Joint Committee to discuss the impact of the brake on the protocol and the Irish border. If they cannot agree, the issue goes to arbitration
• The brake is definitely not a veto. If the arbitration panel concludes that the (arguably highly subjective) conditions for using the brake have not been met, the brake can be disabled, and the law will still be imposed on NI
• The arbitration process is not entirely independent. As Larkin notes ‘the United Kingdom cannot determine finally for itself whether or not the conditions quoted above [for using the brake] are met. This may be finally determined by the arbitration panel, and that panel, by Article 174 of the Withdrawal Agreement, in any case in which a question of EU law arises is bound to refer that question of EU law to the CJEU’. Behind the arbitration panel stands the political European Court of Justice
• The UK government may be extremely reluctant to pull the brake because in the event that is used and regulatory divergence between NI and the EU occurs, the EU has reserved the right to retaliate. The scale of such retaliation is as yet unclear – but no obvious safeguards to keep such retaliation proportionate are evident

The role of EU law in Northern Ireland

As the EU makes clear, the WF does not mean any change to the role of the ECJ in NI – ‘The Court of Justice remains the sole and ultimate arbiter of EU law.’ It is likely that the scope for the ECJ to become involved in NI affairs in practice is reduced by the WF but its ultimate authority remains. The UK government claims that ‘1,700 pages’ of EU law previously applying in NI will be scrapped but this claim is suspect, especially as the government has failed as yet to produce any list of such laws despite prompting to do so.

Regulatory alignment

While the UK government claims that the WF finally ‘gets Brexit done’ and will allow NI to diverge from the EU, in reality the WF is specifically designed to force regulatory alignment between the UK and the EU, using NI as pressure point.

• As noted above, the ‘Stormont Brake’ is unlikely to be used, especially due to the risk of retaliation against the UK by the EU
• The EU’s right to unilaterally change the definition of goods ‘at risk’ of entering the EU via NI and the terms on which these goods may be checked means the EU could react to any UK regulatory divergence by increasing barriers to GB to NI trade. The threat of this is likely to be enough to dissuade the UK from divergence
• The continued application of EU animal and plant health rules in NI is a potentially important constraint on the future of these rules in the UK as it appears to suggest that the UK will need to find a way to ensure that agri-food products entering NI meet these EU standards
• The UK has granted the EU a right of consultation on UK regulatory changes. This needless concession could (and probably will) be used to try to obstruct UK regulatory divergence with the use of threats related to NI
• In another unnecessary concession, the UK and EU will establish an ‘Enhanced Coordination Mechanism’ where protocol-related VAT and excise issues will be discussed. This is designed in part to ensure that UK policy changes ‘cannot negatively affect the EU single market’
• Worse still, the UK has now also committed itself ‘ensure that we monitor and tackle risks of regulatory divergence within the UK internal market’. Indeed, the Office of the Internal Market (OIM) will specifically monitor any impacts for Northern Ireland arising from relevant future regulatory changes, and in cases where the NI authorities request that OIM investigates concerns, will provide a full response taking into account real-world impacts. Moreover, the government ‘will issue new guidance to underscore the need for ongoing vigilance…and proactive steps to avoid new barriers to Great Britain-Northern Ireland trade’. As internal UK divergence would only happen if the UK diverged from the EU, this looks like a recipe for minimising UK regulatory changes in any areas where they come into conflict with EU regulations applying to NI

It is clear from the above that there will be endless discussion and conflict over NI as every proposed UK regulatory change in the EU or UK becomes an issue. It will encourage the EU to cause difficulties and incentivise the UK to avoid them. The WF will thus act as a massive drag anchor on UK regulatory divergence. It might also lead the UK to shadow damaging EU policies such as the proposed Carbon Border Adjustment Mechanism

‘Dual access’

Finally, what should we make of government claims that the WF will turbo-charge the NI economy with an influx of new investment due to NI’s ‘unique’ position with ‘dual access’ to the EU and UK markets? Not much. If this ‘dual access’ was really going to give the NI such a boost, it would already have happened. But, as we have shown elsewhere, far from NI leading the UK regions in terms of recent economic performance, it has been a laggard. Likewise, claims that many billions of foreign investment are waiting on the sidelines to pour into NI should also viewed with a very sceptical eye – the same sorts of claims were made about the original protocol but this money is yet to be seen. The number of new jobs created by FDI projects in NI over the last two years was basically no different to the average over the previous five years.

Conclusion

The new Windsor Framework is largely a PR exercise aimed at persuading UK opinion that large-scale changes have been made to the Northern Ireland Protocol. In fact:

• The basic structure of the protocol is unchanged
• GB to NI trade will remain subject to substantial barriers, governed by an extremely bureaucratic system, with large economic costs
• Changes to VAT, excise duty, and State Aid are minimal
• The ‘Stormont brake’ is probably unusable in practice
• The legal basis of the agreement is very unsatisfactory – such changes as have been made can be withdrawn by the EU, essentially on a whim. The only defence against this would be the ‘Stormont brake’ which as noted is probably only symbolic and unusable. It would have been much better to amend the protocol directly – the choice not to do this is worrying
• New consultation rights for the EU, UK initiatives to minimise regulatory divergence within the UK and retaliation rights for the EU if the UK diverges means that the WF would, if put in place, massively restrict UK regulatory divergence with the EU

The deal cements EU control over economic life in NI and increases the scope for the EU to drag the whole UK into long-term regulatory alignment, thus achieving the EU’s long-standing objective in this area, which it was unable to achieve in the Trade and Cooperation Agreement. Like Maastricht, and Theresa May’s Withdrawal Agreement, a deal being sold as reducing EU power would actually increase it.

Harry Western is the pen name of a senior economist working in the private sector.

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